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Energy Storage Is Finally Finding Its Way

As new revenue streams open up, energy storage could be a big player in the energy industry.

Energy storage in commercial buildings will become more common in the future. Image source: Stem.

Energy storage is coming in a big way in the U.S. and around the world, but before it does, the industry needs to figure out how installing batteries is going to make customers money. Building batteries in buildings or on the utility's grid isn't going to be done because it's cool or somehow saves the planet -- it'll be done because it makes money. And energy storage has the ability to make a lot of money.

But before investors, and manufacturers, get ahead of themselves investing in batteries, we have to understand how energy storage could make money and how the policy environment is opening up these opportunities.

More than a one trick pony

According to the Rocky Mountain Institute, there are 13 benefits batteries can provide to customers, utilities, and the broader grid.

The problem growing battery installations is that demand charge reductions, which normally apply to commercial and industrial customers and not homeowners, have been the only revenue or cost avoidance case to be made for installing batteries. But that's starting to change.

Energy storage technology company Stem has won an 85 MW deal for local capacity from Edison International's (NYSE:EIX) Southern California Edison, bid energy into the market in Pacific Gas & Electric's (NYSE:PCG) territory, and was among 10 winners in Consolidated Edison's (NYSE:ED) demand response auction. These bids into the utility business will stack on top of demand charge reductions already proven out in energy storage, creating a multi-layered value stream.

I recently talked to Stem's CEO John Carrington about Stem's developments, and what's interesting about Stem is that it's not serving commercial/industrial customer or the utility; it's serving both. Batteries will be sited in commercial customer facilities (behind the meter) and provide demand charge reduction each month. But they'll also provide services to the utility as they're needed. And hundreds of sites can be coordinated together to provide the grid services, acting like a virtual power plant.

It may seem mundane, but when you look at the wheel above, the biggest value energy storage may be able to offer the grid in the near term is by deferring investment in distribution, transmission, and new power plants. If a utility can put off spending $1 billion to upgrade equipment for a few years by installing energy storage that costs 1/10 that, it'll be a big value to ratepayers. Look for investment deferral to be a driver of bids going forward.

And Stem isn't alone in seeing energy storage this way. When you look at Tesla Motors' (NASDAQ:TSLA) vision of energy storage you can see a similar strategy unfolding. It's planning to build customer-sited solar, whether it's at a home or a business, and then lower customer costs and aggregate battery packs to provide services to the grid.

What about renewable energy?

One reason energy storage has gotten a lot of attention over the past few years is its potential tie to renewable energy. Tesla Motors and SolarCity(NASDAQ:SCTY.DL) are building systems that can move solar energy created during the day to nighttime hours, and it makes sense that batteries could smooth out the intermittent energy coming from a solar plant.

For now, that's not going to be a driver of energy storage demand because the economics simply don't work (outside of Hawaii). The value is currently in shaving demand charges for commercial customers and then providing services like investment deferral and frequency regulation to the grid. Even in utility scale, solar and wind storage isn't yet a big deal. Energy storage for renewables is coming, but first things first in creating value for energy storage.

The utility tie is key to energy storage

It's important that multiple value streams are starting to open up in storage. As GTM Research's recent report on the economics of commercial energy storage for demand charge reductions concluded, lowering demand charges isn't enough to make energy storage viable in a vast majority of the country. In most cases, energy storage will need multiple value streams to be economically viable, and those value streams are finally starting to open up.

Look for leaders in the industry like Stem and Tesla Motors to begin seeing growing demand from commercial customers as the cost of batteries come down and the revenue from multiple utility value streams start to open up. In energy storage, both the customer and the utility are needed to make batteries economical, and today those value streams are starting to show some real promise.

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.